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Buyer beware: that clever bargain might land you with a rotting ship

More than ever, purchasers in the secondhand market need to be alert to vessels that have suffered from a lack of maintenance as owners slash costs

As the Baltic Dry Index maintained its upward surge this week, pushing through the 1,000-point mark, many owners and operators will have looked on with guarded pleasure.

Rising optimism about the outlook over the next two to three years promises to bring relief to those owners who have been locked into the market during the slump, shackled by barely sustainable debts.

But those owners who are really smiling will be the ones who have splashed out in recent months to snap up secondhand tonnage while prices remain comparatively low. Brokers report that around $1.8bn has been spent on 153 bulkers in the past three months, helping nudge prices up by between 10% and 25%.

Of course, it goes without saying that in a hot market as there is today, speed of execution is vital. Decisions have to be taken quickly and cash needs to be readily available.

However, signs are emerging that some players are allowing exuberance over the need to clinch the deal to cut across good practice.

As we report today, brokers are warning that some buyers are waiving pre-purchase vessel inspections to avoid being gazumped by rivals.

In normal times, taking a calculated risk not to inspect a prospective purchase may be justified. If the seller of the asset is a credible owner who has a good record for maintenance, and the ship has a blemish-free, detention-free record, it could be a justifiable decision.

However, these are not normal times. Owners and operators have slashed repair and maintenance spending in recent years in order to remain solvent. Plenty of reports suggest that many vessels are not in the condition expected.

Last year, insurance giant Allianz was one of the first to alert the industry to the long-term risks inherent in cutting ship operating costs.

Widening use of condition-based maintenance (CBM) was akin to “allowing the crew to put Band- Aids on the ship”, argued an Allianz risk consultant.

CBM risks machinery faults going undetected until a major breakdown, while stretched maintenance intervals add to risks. Lack of standardised or mandatory procedures for lay-up increases the danger of problems on vessels that have been out of service, the insurer argued.

Every owner will be aware that many of the problems caused by poor maintenance do not emerge immediately but only become apparent later when equipment fails catastrophically or inspectors raise a red flag.

Turning a blind eye to such problems may have been culturally acceptable in some parts of shipping 30 years ago, but today it is harder to hide. Not only are port state inspectors more effective, vetting by charterers through RightShip and the Ship Inspection Report Programme is more comprehensive.

Court records are littered with cases in which owners have been tripped up by the poor condition of vessels they have bought. Any lawyer will tell you that pre-purchase inspections are the very least due diligence any sensible buyer should conduct. Caveat emptor.